Prime US REIT - Maybank Kim Eng 2020-08-07: Another Strong Quarter


Prime US REIT - Another Strong Quarter

Delivering ahead again

  • Prime US REIT (SGX:OXMU) delivered 1H20 DPU of USD3.52cts, 5.1% ahead of its IPO forecast, underpinned by its new Park Tower asset, and improving leasing activity in 2Q20.
  • We expect that US office market fundamentals will continue to be supported by demand from financial and professional services, and its growing technology sector. DPU visibility remains backed by its 4.8-year WALE and growth by its well-placed assets, which are under-rented by 7.5%.
  • We maintain our forecasts and USD1.10 DDM-based Target Price (COE: 7.4%, LTG: 2.0%). Valuations are undemanding at 8+% FY20 DPU yield with improving operational performance and potential acquisitions, as re-rating catalysts.
  • BUY.

Up on Park Tower contribution

  • Prime US REIT's 1H20 revenue, NPI and DPU exceeded IPO by projections by +5.7%, +7.6% and +5.1% respectively. This was primarily driven by its Park Tower acquisition in Feb 2020, which partially offset a short-term reduction in demand for parking.
  • Prime US REIT's portfolio occupancy dipped q-o-q from 94.9% to 93.0% with non-renewals at Village Center Station I in Denver (down from 87.2% to 65.1%) and 171 17th St in Atlanta (96.6% to 86.3%). Microsoft’s ongoing expansion should spur demand from technology sector tenancies and support backfilling in the coming quarters. 99.8% of its leases by cash rental income (CRI) remain backed by embedded rental escalations averaging 2.0% pa.

Leasing gaining traction

  • Rental collections in 2Q20 were strong at 99% according to management, with minimal lease deferrals (at 0.2% of CRI) and no rent abatements. A +8.5% rental reversion was achieved on long-term leases (vs +6.3% in 1Q20) with over 60% of its leases renewed by its existing tenants.
  • Leasing activity has gained traction with ~52.5k sf added in 2Q20 (from 30k sf in 1Q20) and 36k sf post its 1H20 at positive reversions.
  • DPU visibility remains high and supported by its 4.8-year WALE (5.6 years for its top ten tenants) with 3.3% of its leases (by CRI) expiring in 2020.

Strong balance sheet, stacks well against peers

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-08-07
SGX Stock Analyst Report BUY MAINTAIN BUY 1.100 SAME 1.100